Research & Forecast Report AUSTIN | OFFICE Q2 2019 Kaitlin Holm Research and Marketing Coordinator | Austin Boots On The Ground Commentary by David Bremer Our “Boots on the Ground” viewpoint is the voice of our experts, who have broken down the market data and compared it to what they are seeing for themselves. This is their take on what the numbers actually mean for the Austin office market. Austin’s market continues to expand at an unprecedented pace, led by significant corporate expansions and hiring coupled with significant organic growth. To Austin’s credit, it has largely been able to maintain it’s notable quality of life, with WalletHub recently naming Austin as the second-best city to live in. Austin was also noted as the number four city out of 100 major metropolitan areas for STEM capability (Science, Technology, Engineering and Math). Technology companies continue to be the primary driver of Austin growth. The city now has eight tech companies (Apple, Dell, IBM, Google, Indeed, Samsung, NXP and Applied Materials) occupying or preparing to occupy over one million square feet. Others, such as Oracle and Facebook, will likely be approaching these sizes in the near future. A substantial amount of space is under construction and these tech giants show no signs of a slowdown, which means there will be a continued surge in hiring and more people on the highways. Location-wise, the majority of these high-growth companies will be in the CBD or in North Austin. When you take into account the likely additional expansion in far Northwest Austin by Apple and a few other companies close to taking down real estate (150K-450K SF) citywide, we have every reason to believe that the employee migration to Austin will continue. The result of all of this demand has kept the market extremely tight and has continued to push rates upward. Medium and large companies are urged to start the real estate evaluation process sometimes 2-3 years in advance in case they have to consider build-to-suits or pre-leases due to lack of availability. An active market also means very busy construction crews. Finish-out pricing has trended significantly upwards and is now one of the most important factors to evaluate when comparing options on the market. Parking is also near the top for items to discuss on the front end as higher rates result in a flight toward higher density. Tech companies continue growth in Austin’s office market Future Forecast Austin is set to deliver a huge amount of new office space in the next 3 years, but much of this space is pre-leased well in advance of delivery. Barring a significant national economic slowdown (elections, financial markets, etc.), we don’t see a reason why Austin would slow in the coming months or quarters. Occupancy levels are rising in the short term until some of the new projects start to deliver and we believe the cost of space will continue steadily increasing until the supply and demand evens out. Tip: When looking at new product, operating expenses (primarily taxes) are quoted as artificially low. In the past, these expenses were generally modeled as a slow escalation over 2-3 years as the taxing authority caught up to full valuation. We feel there is likely to be a new trend of very fast tax/expense catch up, so make sure your broker is advising you smartly and conservatively on this front. By The Numbers TOTAL INVENTORY 59.2M SF TOTAL VACANCY 9.5% Q2 NET ABSORPTION 528,811 SF YTD NET ABSORPTION 493,477 SF TOTAL UNDER CONSTRUCTION 5.29M SF TOTAL PRE-LEASED 2.15M SF CBD CLASS A $60.47 as tracked by Colliers SUBURBAN CLASS A $41.19 as tracked by Colliers AVERAGE RATE/SF $35.74 *Rates inclusive of estimated operating expenses.
Transcript
Research & Forecast Report
AUSTIN | OFFICEQ2 2019
Kaitlin Holm Research and Marketing Coordinator | Austin
Boots On The Ground Commentary by David Bremer
Our “Boots on the Ground” viewpoint is the voice of our experts, who have broken down the market data and compared it to what they are seeing for themselves. This is their take on what the numbers actually mean for the Austin office market.
Austin’s market continues to expand at an unprecedented pace, led by significant corporate expansions and hiring coupled with significant organic growth. To Austin’s credit, it has largely been able to maintain it’s notable quality of life, with WalletHub recently naming Austin as the second-best city to live in. Austin was also noted as the number four city out of 100 major metropolitan areas for STEM capability (Science, Technology, Engineering and Math).
Technology companies continue to be the primary driver of Austin growth. The city now has eight tech companies (Apple, Dell, IBM, Google, Indeed, Samsung, NXP and Applied Materials) occupying or preparing to occupy over one million square feet. Others, such as Oracle and Facebook, will likely be approaching these sizes in the near future. A substantial amount of space is under construction and these tech giants show no signs of a slowdown, which means there will be a continued surge in hiring and more people on the highways. Location-wise, the majority of these high-growth companies will be in the CBD or in North Austin. When you take into account the likely additional expansion in far Northwest Austin by Apple and a few other companies close to taking down real estate (150K-450K SF) citywide, we have every reason to believe that the employee migration to Austin will continue.
The result of all of this demand has kept the market extremely tight and has continued to push rates upward. Medium and large companies are urged to start the real estate evaluation process sometimes 2-3 years in advance in case they have to consider build-to-suits or pre-leases due to lack of availability. An active market also means very busy construction crews. Finish-out pricing has trended significantly upwards and is now one of the most important factors to evaluate when comparing options on the market. Parking is also near the top for items to discuss on the front end as higher rates result in a flight toward higher density.
Tech companies continue growth in Austin’s office market
Future Forecast
Austin is set to deliver a huge amount of new office space in the next 3 years, but much of this space is pre-leased well in advance of delivery. Barring a significant national economic slowdown (elections, financial markets, etc.), we don’t see a reason why Austin would slow in the coming months or quarters. Occupancy levels are rising in the short term until some of the new projects start to deliver and we believe the cost of space will continue steadily increasing until the supply and demand evens out.
Tip: When looking at new product, operating expenses (primarily taxes) are quoted as artificially low. In the past, these expenses were generally modeled as a slow escalation over 2-3 years as the taxing authority caught up to full valuation. We feel there is likely to be a new trend of very fast tax/expense catch up, so make sure your broker is advising you smartly and conservatively on this front.
By The Numbers
TOTAL INVENTORY
59.2M SFTOTAL VACANCY
9.5%
Q2 NET ABSORPTION
528,811 SFYTD NET ABSORPTION
493,477 SFTOTAL UNDER
CONSTRUCTION
5.29M SFTOTAL PRE-LEASED
2.15M SFCBD CLASS A
$60.47as tracked by Colliers
SUBURBAN CLASS A
$41.19 as tracked by Colliers
AVERAGE RATE/SF
$35.74*Rates inclusive of estimated operating expenses.
2
Austin Office OverviewIn the second quarter of 2019, Austin’s office market reported 528,811 SF of positive net absorption. The majority of the positive absorption occurred in Class B buildings with a total of 430,300 SF of positive net absorption. Class B buildings in Austin posted 112,462 SF of positive net absorption, while Class C properties posted 13,951 SF of negative net absorption.
Currently, 5,290,054 SF of office space is under construction and 2,156,834 SF of that is pre-leased. The third quarter of 2019 is expected to see 883,094 SF of deliveries and 664,679 of that is pre-leased. One of the buildings set to deliver in the third quarter of 2019 is Offices at Saltillo, which was supposed to deliver in the second quarter. The entire 150,000 SF East-side building is already 100% leased to Google.
SXSW Center in the CBD submarket was the largest building to deliver in the second quarter. This 140,000 SF building delivered in May and is 94% leased by a few large tenants including SXSW and WeWork. The third quarter of 2019 is expected to see twelve new buildings come online.
The citywide average rental rate increased over the quarter from $35.55 per SF in Q1 2019 to $35.74 per SF in Q2 2019. Class A rental rates in Austin’s CBD increased by 3.6% over the quarter to $52.78 per SF up from $50.90 per SF in the first quarter of 2019. The overall suburban Class A rental rate also increased, from $37.67 per SF to $37.97 per SF, over the quarter.
In May, CNBC announced that Austin has been ranked one of the best big cities for starting a business. Austin ranked fourth behind Orlando (FL), Oklahoma City (OK) and Miami (FL). Austin beat out large cities like Atlanta and Denver and some other “tech” cities like Durham and Raleigh, North Carolina. The rankings were based on nineteen key metrics, including: job growth, share of college-educated population, office space affordability and corporate taxes. Cities with some of the largest populations, like New York, didn’t make the list because they tend to be some of the least affordable places to live.
Vacancy & Availability
Austin’s citywide vacancy rate decreased slightly from 10.3% in the first quarter of 2019 to 9.5% in the second quarter of 2019. The Southeast submarket’s Class C vacancy rate saw over 55,000 square feet come onto the market in the second quarter, which is why they had the largest jump in vacancy moving from 4.5% in Q1 2019 to 24.2% in Q2 2019.
The largest decline in vacancy happened in the Class A Southwest submarket, where the rate decreased from 12.6% to 10.2%, which is due to over 345,000 square feet being taken off the market.
Overall suburban vacancy decreased quarter over quarter from 11.4% in Q1 2019 to 10.3% in Q2 2019, while the CBD’s vacancy rate increased over the quarter from 5.6% to 6.0%.
2 Austin Research & Forecast Report | Q2 2019 | Office | Colliers International
Net Absorption (Million Square Feet) -.262 -0.035 .528
New Construction (Million Square Feet) 1.23 .378 2.46
Under Construction (Million Square Feet) 4.09 3.18 5.29
Class A Vacancy Rate CBD Suburban
9.9%11.1%
6.0%10.9%
5.9%9.3%
Gross Asking Rents Per Square Foot Per Year
Average $34.37 $35.55 $35.74
CBD Class A $50.01 $50.90 $52.78
Suburban Class A $36.20 $37.67 $37.97
0.0
2.0
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-100,000
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Net Absorption New Supply Vacancy
ANNUAL ABSORPTION, NEW SUPPLY, AND VACANCY
$0.00
$10.00
$20.00
$30.00
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$50.00
CBD Rents Suburban Rents
0.0%
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CBD Vacancy Suburban Vacancy
8.5%
9.0%
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10.5%
11.0%
11.5%
-200,000
0
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600,000
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Net Absorption New Supply Vacancy
Absorption & DemandAustin’s office market posted 528,811 square feet of positive net absorption in Q2 2019. The only submarkets that experienced loss over the quarter were the Northeast submarket (74,550 square feet of negative absorption) and the CBD submarket (54,501 square feet of negative absorption).
A majority of the negative net absorption over the quarter occurred in the Class B Northeast submarket, totaling 74,650 square feet of negative absorption. In April, all of Promontory Point C (46,893 square feet) was put on the market brought the submarket’s net absorption number down quite a bit. In all, 89,695 square feet came to the Class B Northeast submarket.
The Northwest submarket helped push the absorption balance into positive numbers with 197,224 square feet of positive net absorption. The majority of the absorption in the Northwest submarket happened Class A space and can be attributed to Allergan moving into an estimated 43,000 square feet at Riata Corporate Park 2 (12301-B Riata Trace Parkway).
The Austin market recorded forty-eight signed leases in the second quarter with some big tenants leading the way. Visa signed their 133,823 square foot lease for Research Park Plaza Building I at 12401 Research Boulevard, while Apple is set to take even more space in the tech corridor by taking all of Parmer 3.4. The 115,000 square foot building was just completed late last year.
Rental RatesAccording to CoStar, our data provider, Austin’s citywide average rental rate increased 1.16% over the quarter from $35.33 per SF to $35.74 per SF.
As expected, the highest rates across the Austin office market in the second quarter were in CBD Class A buildings where net rental rates averaged $52.78 per SF. Rental rates were also high in the East and South submarkets where Class A rental rates reached $49.27 per SF and $43.89 per SF, respectively.
Citywide Class B rental rates rose slightly in Q2 2019 to $31.33 per SF from $30.80 per SF in Q1 2019. CBD Class B rental rates increased by 2.0% over the quarter from $47.17 per SF to $48.15 per SF in Q2 2019.
3 Austin Research & Forecast Report | Q2 2019 | Office | Colliers International
44 Austin Research & Forecast Report | Q2 2019 | Office | Colliers International
Q2 2019 Top Office Lease TransactionsBUILDING ADDRESS SUBMARKET SF TENANT LEASE DATE
12401 Research Blvd Northwest 133,823 Visa Apr-19
13011 McCallen Pass Northeast 115,000 Apple Apr-19
8407 Wall St Northeast 109,312 Texas Department of State Health Services1 Jun-19
7501 Capital Of Texas Hwy N Northwest 87,408 Indeed, Inc.1 Apr-19
405 Colorado St CBD 69,550 DLA Piper Apr-19
2010 S Lamar Blvd South 63,903 JUUL3 May-19
401 S 1st St South 50,000 Baker Botts May-19
200 W 6th St CBD 33,505 Brown Advisory, LLC May-19
2101 E Saint Elmo Rd Southeast 31,000 MedtoMarket, Inc Apr-19
805 Las Cimas Pky Southwest 30,026 Aeglea BioTherapeutics, Inc. Apr-19
901 E 6th St East 29,047 OpCity May-19
13785 Research Blvd Far Northwest 25,270 Ping Identity Corporation May-19
800 Brazos St CBD 23,656 ACloudGuru Jun-19
835 W 6th St CBD 21,309 Clear Data2 Jun-19
1400 Lavaca St CBD 20,816 Butler Snow May-19
916 S Capital Of Texas Hwy Southwest 18,447 AXA Financial Advisors May-19
979 Springdale Rd East 17,686 Scale Factor3 Apr-19
5001 Plaza On The Lake Dr Southwest 17,416 Amherst Insight Labs LLC May-19
5812 Trade Center Dr Southeast Ind 15,520 Frontgate Holdings, LLC May-19
Leasing ActivityAustin’s office market recorded 1,436,717 SF of leasing activity in Q2 2019. Major transactions this quarter included Visa leasing all of Research Park Plaza Building I (12401 Research Boulevard), Apple taking 115,000 SF at Parmer 3.4 (13011 McCallen Pass) and Texas Department of State Health Services renewing their lease at the Exchange Building (8407 Wall Street).
1 Renewal 2 Sublease 3 Colliers Deal
Q2 2019 Significant Sales Transactions – (100,000 SF or greater)
BUILDING ADDRESS SUBMARKET RBA (SF) YEAR BUILT BUYER SELLER SALE PRICE $/SF CLOSED
TIER REIT to Cousins Properties Inc Portfolio (13 bldgs) 1
Research Park Plaza Bldg I & II - 12401 Research Blvd 1
Northwest 266,930 1999 DWS Spear Street Capital $123,500,000 $462.67 Jun-19
Exchange Building - 8407 Wall St Northeast 109,315 1985 Capital Commercial
Investments, Inc. The Keystone Group Undisclosed N/A Jun-19
Sales ActivityAustin’s office investment sales activity included seventeen building transactions, with fifteen of them being a part of two different portfolio transactions. In June, Cousins Properties Incorporated purchased thirteen buildings in Austin as part of a twenty-four property portfolio from TIER REIT, Inc. The average price per square foot for those thirteen properties was $470.09. The largest stand alone purchases was Credit Suisse Asset Management buying Third + Shoal from Cielo Properties.
Sources: CoStar and Real Capital Analytics1 Part of a portfolio
5 Austin Research & Forecast Report | Q2 2019 | Office | Colliers International
7 Austin Research & Forecast Report | Q2 2019 | Office | Colliers International
Office Development Pipeline5,290,054 square feet of office space was under construction during Q2 2019. Two buildings delivered in Q2, with the largest being SXSW Center (1400 Lavaca Street). The 140,000 square foot building was 94.3% leased at delivery and 64,967 SF of that will be occupied by WeWork. 41% of the space under construction is already pre-leased and almost a million square feet is set to deliver in Q3 2019.
BUILDING NAME ADDRESS SUBMARKET SF PRE-LEASED DEVELOPER EST.
DELIVERY
Foundry 310 Comal St East 75,369 92.1% Cielo Realty Partners Jul-19
Offices At Saltillo 901 E 5th St East 150,000 100.0% Endeavor Real Estate Group Jul-19
Met Center Creative Office-Building A 8000 Metropolis Dr Southeast 71,225 0.0% Zydeco Development Jul-19
Bldg 2 1601 E Pflugerville Pky Far Northeast 10,378 34.1% Unknown Jul-19
Met Center Creative Office-Building B 8000 Metropolis Dr Southeast 67,625 0.0% Zydeco Development Jul-19
Colliers International | Austin111 Congress Avenue, Suite 750 Austin, Texas 78701+1 512 539 3000colliers.com/austin
FOR MORE INFORMATIONKaitlin HolmResearch and Marketing Coordinator | Austin+1 512 539 [email protected]
Q2 2019 Austin Office Highlights
QUOTED GROSS RENTAL RATES FOR EXISTING TOP PERFORMING OFFICE BUILDINGS
BUILDING NAME ADDRESS SUBMARKET RBA (SF) YEAR BUILT
% LEASED
AVAIL. SF
RENT ($/SF) OWNER
100 Congress 100 Congress Ave CBD 411,536 1987 99.79 40,039 $73.05 Invesco Ltd.
Stonebridge Plaza I 9606 N MoPac Expy Northwest 200,628 1999 99.29 1,431 $47.68 Intercontinental Real Estate Corporation
San Jacinto Center 98 San Jacinto Blvd CBD 410,248 1987 98.75 69,509 $68.61 Cousins Properties Incorporated
7700 Parmer B 7700 W Parmer Ln Far Northwest 335,138 1999 98.40 5,373 $40.77 Accesso Partners
Chase Tower 221 W 6th St CBD 389,503 1972 98.31 6,592 $66.51 Lincoln Property Company
300 West Sixth 300 W 6th St CBD 454,225 2001 97.50 29,840 $68.65 CalSTRS
2nd Street District 200 W Cesar Chavez St CBD 219,828 2001 97.16 58,933 $81.00 Silicon Labs
Austin Centre 701 Brazos St CBD 326,335 1986 96.74 17,080 $58.41 Sidra Real Estate, Inc.
7700 Parmer C 7700 W Parmer Ln Far Northwest 300,274 1999 96.64 10,101 $41.98 Accesso Partners
One Eleven Congress 111 Congress Ave CBD 518,385 1985 95.87 74,832 $68.19 Cousins Properties Incorporated
Note: Avail. SF includes direct and sublet space as well as any future available space listed. Source: CoStar Property
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